In the real estate business we often hit cases where a buyer may need to tap into the Bankof Mom and Dad or perhaps another relative. Many times these transactions take place in secret, without the buyer informing his mortgage company. The common attitude is, “What business is it of theirs if I get some help from mom and dad?” Unfortunately, it is their business and they will discover it anyway when they look at the detailed bank statements that the underwriter will ask to see perhaps going back as long as six months or more.
Why is that their business? Well there are a couple of reasons that mortgage underwriters look to see where the money is coming from in a real estate sale. One reason is an unfortunate sign of our times and that is that real estate sales have often been used by drug dealers to launder their ill-gotten gains. Any large sums (and not that large to attract attention) that flow into the buyers account in the last six months will be questioned and documentation demanded for the source of those funds. If you sold something else, maybeeven another property, and the money came from that, you will need to document that sale.
Perhaps the money is coming from parents or relatives. That’s not illegal or necessarily bad, if it is a gift; however, the underwriter is going to want proof that it is a gift and not a loan, which would count against your debt to income ratio. You will be asked to provide a letter from the person giving you the money that states that it is a gift with no expectation of it ever being paid back. If there is any expectation that you’ll pay it back “once you get on your feet”, it will be treated like a loan and probably screw up your debt to income ratio and could cost you the mortgage.
I’ve also seen buyers go out and spend money for things like furniture for the new place or maybe even a new car after they’ve been pre-qualified, but before the underwriting is done. They also think, what business is it of theirs if I buy furniture or a car. What does that have to do with the house mortgage? Any new and big expenditures like those will also impact your debt to income ratio and could screw up the mortgage process.
The bottom line is that once you apply for a mortgage, your life becomes an open book, atleast to the mortgage underwriter. He/she is going to want to know everything about your and your finances. The amount of detail that the underwriter may ask for and the depth to which he will probe may surprise and even annoy you; however, he is trying to learn enough about you very quickly to make a call for the bank on whether or not you are a good credit risk and will be able to repay the loan. You might not be able to repay it if you are in jail because it was drug money or if you also have to repay that relative who so kindly “loaned” you that money for your down payment.
So, it really is their business and they are usually very good at it, so don’t think you are going to outsmart them with a wink and a nod to your parents about their “gift”. The penalties for fraud, which is what that would be, are quite stiff and could even land you in jail right next to that drug dealer.